Why Advanced Renewable Fuels Will Not Play A Significant Role In Meeting Climate Change Goals

December 30, 2015 |

Sklar-123115-smBy Tim Sklar, Special to The Digest

From our perspective as developers of bio-fuels projects, this past year has been disappointing as the initial interest by potential participants in our modest wood waste-to-advanced renewable fuels plant project has waned. We have also observed that over the last year, the few projects of this type we have been monitoring that had reached demonstration stage have yet to be successfully scaled up. And as everyone knows, the market prices for biofuels has dropped, reflecting the drop in market prices for fossil fuels, making it much harder to justify biofuels plant projects as potentially sound investments.

sklarAdding to this malaise is the uncertainty associated with continuance of supportive energy policies that the advanced renewable fuels industry has relied upon. Further, our take-a-way from attending the ABLC2015 conference has raised concerns as to whether advanced biofuels will be produced in significant quantities at competitive prices any time soon.

Subsequent to this conference a number of developments have occurred that have further clouded the outlook for developing biofuels production capacity, making it harder for all of us who are involved in biofuels project development to justify staying the course.

The impetus behind writing this article is to re-assess the status of biofuels project development and where we it headed in light of what has transpired at the recently held Paris Climate Change Conference. As reported, a consensus was reached by the 150 nations that were represented, that a worldwide attempt must be made to arrest the rise of global temperatures over the next 35 years, to not more than 2oC (3.6oF) above pre-industrial levels. This is a most significant development and pursuit of this goal could have a material impact on future use of advanced biofuels. In preparing this article, extensive use was made of a number of reports and related articles that have appeared leading up to this conference and in its immediate aftermath.

Whether what was reported in these articles would re-kindle interest in advanced biofuels have yet to be determined. But it is hoped that this article will shed light on this possibility. In preparing this article, a careful review of this material was made to better determine whether it is likely that concerted effort will be made to significantly increase the availability and use of advanced biofuels over the next several years, and if so, whether such an effort will have a significant enough impact to make a difference in the world’s attempt to arrest the rise of global temperatures to 2oC, as called for by those participating in The Paris Conference.

To make this assessment, synopses of four of the most timely and relevant articles have been undertaken. Unfortunately, none of these recent reports and articles specifically address the role advanced biofuels are expected to play in arresting global climate change. But it was possible to draw inferences, to highlight concerns, and to arrive at some conclusions. The intent of this article is to assist those that are active in advancing the use of biofuels to better predict where things are headed, and to better determine the extent to which advanced biofuels will be needed.

A Quick Summary of The Four Recent Articles Selected for Review

The first article that has been summarized is special report appearing in The Economist Magazine covering the Paris Climate Change Conference. As reported, delegates attended this conference from 150 countries in order to discuss how each country was planning to contribute to arresting expected worldwide increases in greenhouse gas emissions. Unfortunately, a number of issues had been raised in the conference proceedings that appear to be inadequately addressed, if targets set for limiting such emissions are to be met.

The second article also appeared in a recent issue of The Economist Magazine. that reported on how the oil companies have reacted to the Climate Change debate and what they plan to do about it. It seems that they plan to stay in the fossil fuel business while taking some actions that will lower the widely held perceptions as to their role as major contributors to the growth of greenhouse gas emissions. However, this article raises added concerns, as oil companies have a different perspective than do climatologist, politicians, other energy producers and end users. Our interest is in how their positions could impact future development and use of biofuels.

The third and fourth articles that were used, appeared in recent issues of The Biofuels Digest. One deals with recent EPA rules that are expected to be problematical to the advanced biofuels development community. The other addresses what is really needed in order to support the research and development efforts that will be needed in order to come up with game changing innovations that can really reign-in climate change. The innovations addressed are those included in the investment strategy that Bill Gates and his Breakthrough Energy Coalition announced at The Climate Change Conference. Again, our specific interest is in trying to determine if anything they propose will help support the advancement of the biofuels industry.

Embedded in italics in each of the synopses are observations and comments that have been made that address our specific concerns. Following these synopses is a set of conclusions, predictions of future developments in biofuels and an assessment of the limited role we expect advanced biofuels will have in meeting climate change goals.

11/28/15 Special Report in The Economist Magazine, titled “Climate Change, Hot and Bothered”.

This report was published just prior to the Paris Climate Change Conference, to put the anticipated presentations into a contextual framework and to second guess the effectiveness that some of the proposals will have in reducing global warming over the next 35 years.

This report contains discussions of what the authors have considered to be the most important climate change topics. One section contained a summary of the science of climate change and what are the key known-unknowns. Another section addresses renewable energy and in particular, wind energy, and what will limit its use. Another topic covered deals with the impact that climate change is having on agriculture and on bio-diversity, how poor countries are trying to adapt and what other remedies appear to be promising. There is also a foreword looking section dealing with geo-engineering and how it could be used to remove greenhouse gases from the atmosphere.

Observation: Missing from this chosen list of topics is a discussion of biofuels and the role they are expected to play in arresting global warming.

The lead-in to these sections is titled “hot and bothered” and supposedly reflects the concerns of the delegates from 150 countries that participated in this UN sponsored Paris Climate Change Conference. It seems that they are all concerned by increases in greenhouse gases trapped in the atmosphere and the impact they are having on climate change. The article cites the fact that since the first such conference was held in 1995, the atmospheric concentration of CO2 was 361 ppm and as of last year, it has rapidly increased to 399 ppm.

Observation: It seems that the conference delegates are no longer in denial over global warming as they have already agreed that global temperatures must not be allowed to rise by more than 2oC (3.6oF) above pre-industrial levels”…and that “anything more would be wildly dangerous.” This in it self is an important development.

This article also cites a leading climatologists’ estimate that in order to cap global warming to 2oC : the atmosphere will only be able to absorb at most 3,200 gigatons of CO2; it is already holding 2,000 gigatons; and if emissions continue at current levels, this 3,200-gigaton “budget” will be reached in just 30 years time.

Observation: This seems to have given delegates a basis for setting Year 2050 as the target date of achieving the 2oC ceiling.

The article reported that all 150 countries that attended already have or have voluntarily agreed to submit proposals for what they plan to do to reduce carbon dioxide and other harmful greenhouse gases. However, each plan is expected to be tailored each country’s facts, circumstances, economic realities and political climate.

Observation: To date, the global efforts to tackle climate change have been inadequate and prospects for a quick fix are illusory, but this is a good start. Unfortunately, at this point in time, little is known as to how the measures each country plans to take will add up on a world-wide basis, let alone what the overall impact these plans will have on the future use of and demand for biofuels.

With respect to increasing the use of renewable fuels in lieu of fossil fuels to provide energy, this report suggests that a clear consensus has yet to be reached as to what counts as a source of “renewable” energy or how much “renewable” fuel can theoretically be produced.

Observation: It is too late for those that do not consider advanced biofuels as a renewable fuels, as advanced biofuels have already been accepted to be in the renewable category by those agencies and organizations that provide energy information, by analysts that use such information and by those that promulgate environmental protection regulations.

With respect to estimating how much renewable energy is being used, this report cites data obtained from The International Energy Agency (IEA). IEA estimated that in 2013, 13.5% of the world’s energy supply was produced from renewable sources with “biofuels” contributing 10.1% with the remaining 3.4% of renewable energy being generated using hydro, wind, solar, tidal, and geothermal power.

However, the IEA indicates that 75 percent of this biofuels component contributes significantly large amounts of greenhouse gasses into the atmosphere, as it is comprised of the wood, dung and charcoal that is burned directly in primitive wood stoves in poor countries of the world.

IEA also points out that although hydropower is considered renewable, and it is the world’s second most important source of renewable energy, it has fallen out of favor in the West because of its often-ruinous effect on river ecosystems.

IEA estimates that only 1.3% of the world energy supply comes from agri-crop derived biofuels such as ethanol and from cellulosic derived biofuels such as bio-coal, ethanol, methanol, bio-diesel, bio-jet fuel and bio-gasoline.

IEA also points out the fact that nuclear energy has been supplying 5% of the world’s energy needs but it is considered to be green but not renewable.

Further, some will argue cellulosic wastes that are used for generating heat and power even in low emission facilities, add emissions, and these emissions should not be treated as an offset for carbon originally captured in the biomaterial when determining their impact on the “global emissions budget”.

Observation: The bottom line on all of this is that even when using IEA’s renewable fuels definitions and estimates, and accepting the argument that advanced biofuels are to be considered as carbon neutral, it is apparent that if advanced biofuels capacity were to be developed to fullest, its impact on reducing greenhouse gases will be modest, at best. This may be the reason why this report on the Climate Change Conference contains so little discussion of biofuels.

This report also suggests that global climate change could be effectively tackled if caps are imposed on greenhouse gas emissions. Admittedly, this is a fragmentary approach, as each country would have to voluntarily set their own restraints. This report suggest that a more realistic approach would be to have each country tax carbon to the level needed to curtail use of cheap “dirty fuels”.

Observation: To its credit The Economist’s authors of this report recognized the fact that taxes of any sort taxes are a “hard-sell”, and that economic displacement caused by such a re-alignment of energy use has risks and unknown economic consequences.

This report also addresses why renewable energy subsidy programs can be expected to have unintended consequences that erode the benefits that may be intended. Specifically cited as a prime example is Germany’s recent experience with payment of high feed-in tariffs to wind and solar power providers, where these “subsidies” have precipitated closures of higher cost cleaner burning coal fired power stations as well as power plants that use natural gas, while fostering the re-commissioning of old lignite burning power stations.

Observation: All energy sources and uses around the globe can best be described as a complex set of interactive systems consisting of feedback loops that often amplify imbalances. So beware of simple cause and effect explanations for suggested changes in energy policy.

This report then presents three possible pathways to be considered in order to arrest global warming. The first pathway involves undertaking of much larger commitments to “geo-engineering” in order to reduce greenhouse gas emissions associated with modern agriculture, electricity generation and convenient transport.

Observation: This report endorses Bill Gates’ view that the best way to arrest global warming is through innovation. See our synopsis below.

The second pathway is to build on the international consensus reached at The Paris Conference by having countries “upgrade their promises for cutting emissions” to a more meaningful level, then to focus more on ways to reduce emissions of greenhouse gases other than CO2, such as methane, black carbon and hydro-fluoro-carbons, as these emissions would result in quick noticeable changes to global warming. Observation: This appears to be easier said than done.

The third pathway being suggested calls for countries that import goods from countries that host industries who are major polluters, to impose tariffs on imported goods, based on their carbon content, while deducting any carbon taxes paid to the country of origin from the amount levied. This they believe would have the effect of encouraging countries that host companies that are high polluters, to impose such a tax. But those proposing such schemes recognize that such measures would suppress trade and in some cases, might be considered illegal.

Observations: None of the three pathways address a pathway that specifically considers maximization of the use of advanced renewable fuels in lieu of fossil fuels now used in the transportation sector. It is still our belief that this pathway could contribute immediately and significantly to reducing greenhouse gases. Significant progress is being made in the technology for producing advanced biofuels and scale-up problems are being solved by those technology providers that have reached the demonstration plant stage.

Commentary: Advanced renewable fuels are now being produced that meet conventional transportation fuels specifications either in blends with fossil fuels or as drop-in fuels. Although little needs to be invested in fuels storage and distribution infrastructure in order to make advanced biofuels readily available to fuels users, the major impediments to increased use of advanced biofuels at this point in time are cost, scarcity and price.

With respect to cost, there are few if any advanced biofuels plants that have reached commercial scale and can produce advanced biofuels at a cost comparable to the cost of producing refined petroleum products. However the value-added costs of producing biofuels from cellulosic waste is dropping, as technology being used is becoming more efficient and as scale-up problems are solved.

With respect to prices that can be realized in the market place for advanced biofuels, they remain too low as they reflect depressed fossil fuels prices and the advanced biofuels industry still requires direct or indirect subsidies. Experts agree that crude oil and fossil fuel prices will increase as soon as the worldwide fuels supply-demand equation normalizes.

But no one has the prescience to say with certainty, when this will happen. When it does, we believe that these advanced fuels will be in a position successfully compete with fossil fuels in the fuels market place on a more equal basis and without subsidies. But these uncertainties are preventing more robust investment and development of advanced bio-fuels capacity.

 

11/18/15 The Economist Article titled “Oil Companies and Climate Change”.

As reported in this article, up until this point in time, the oil companies have only paid lip service to the need to curb the use of fossil fuels. In the 1990’s when environmentalists first launched campaigns to encourage debate about climate change, prices for crude oil had been steadily rising, especially after the global financial crisis, forcing those in the green-energy business to scale back, while oil companies continued to pour money into hydrocarbons. And even after the dramatic fall in oil prices have forced them to start cutting some big exploration projects many oilmen insist that demand for fossil fuels will keep growing strongly for the foreseeable future.

This article lists three ways oil companies plan to stay in the fossil fuel business while promoting reductions in greenhouse gas emissions. They include: 1) promoting the development of power plants that use natural gas and closure of coal-fired power plants; 2) supporting more energy efficient vehicles; and, 3) reducing the amount of methane gas that leaks out of their oil and natural gas wells, their refineries, their natural gas plants and their petrochemical processing plants.

This article indicates that some oil companies now believe the time has come for governments to impose a carbon tax on emitters of greenhouse gases, thereby discouraging use of coal in favor of natural gas. But critics of the oil industry believe that such a policy is self serving and cynical, as carbon taxes are often politically impossible to get enacted.

Observations: It seems that the Paris conference pledges have caught many oil company executives by surprise. But some now have the honesty to admit that climate change policies will in all likelihood, be undertaken and that such policies will materially affect their business.  

Although some oilmen are expected remain foot-draggers in dealing with climate change, we believe that there are a number of big oil company executives who are already in general agreement with the Paris conference and consider the goal of limiting global warming to two degrees to be a desirable target.

But many are not yet committed to replacing fossil fuels with renewable fuels. Instead, they are “cleaning up” their energy portfolios by investing more heavily in producing natural gas. And those that are investing in renewable energy and in particular, in renewable fuels include those investing in solar power as opposed to advanced biofuels. We agree that it is not only cynical for the oil industry wanting to use carbon taxes to discourage coal use to support natural gas use and not advanced biofuel us., It is also most unfortunate, as they could and should invest in development of advanced biofuels as well.

12/9/15 BFD Article titled “EPA’s Contrary Rule Is A Gut Punch to Advanced Biofuels”, by Brent Erickson, EVP, BIO

The Environmental Protection Agency’s (EPA’s) Renewable Fuels Standards had originally been established to satisfy Congress’s intent to encourage the reduction in the use of fossil fuels by “mandating” the increased use of advanced biofuels (a.k.a. advanced renewable fuels). The intent of these RFS mandates had always been to “provide market pull for biodiesel producers and certainty for the innovators who are commercializing new advanced cellulosic biofuels.

Annual targeted RFS amounts for advanced biofuels were initially set through Year 2022. And over the past decade, the RFS program has had modest success in reducing fossil fuel use. For example, it has been estimated that US produced renewable fuels have replaced 1.0 billion barrels of foreign oil over the last 10 years, resulting in reductions of 589.3 metric tons CO2 emissions. Unfortunately, the initial RFS mandated targeted amounts of advanced biofuels have not been attained and EPA has been forced to make revisions to these targets. After a two-year delay, The EPA has just announced RFS revisions for Years 2014, 2015 and 2016.

In a recent Biofuels Digest Article titled “EPA’s Contrary Rule Is A Gut Punch to Advanced Biofuels”, its author, Brent Erickson, EVP, BIO reports that EPA’s new rules are flawed. He opines that EPA should have but did not give the petroleum refiners a set of standards that are supposed to be more attainable, while still resulting in significant reductions in CO2 emissions. He points out that these latest revisions to RFS rules ”riddled with contradictions and confusing logic” and provide relief to oil refiners on the amount of biofuels that they would otherwise be mandated to supply.

He warns that these rules could “undercut investment in biofuels refining capacity and resulting in the “slow progress in commercializing advanced biofuels at a time when a stable and predictable regulatory framework is needed.” Erickson then estimates that EPA’s latest delay in issuing its new and confusing RFS rules has caused a $13.7 billion shortfall in (biofuels) investment over the past several years”.

Erickson also criticizes EPA in the way they have implemented the Renewable Identification Number (RIN) system that Congress had directed them to implement in lieu of a “Carbon Tax” or a “Cap ’n’ ’Trade” scheme as a way of taxing carbon. This RIN system was originally intended to provide “tradable credits” for oil refiners to use in order to equalize the (financial) burden among them when blending biofuels. Erickson now blames EPA in its recent RFS rulemaking for absolving the oil industry of any responsibility to do anything more than “to acquire RINs from other’s use of renewable fuels”.

Observation: This absolution is believed to have come about as a consequence of the collapse of fossil fuel prices and the RIN values, making their use of little consequence.

11/30/15 BFD Article titled “Gates, Zuckerberg, Branson, Bezos, Stever, Khlosa, Doerr, 20 Others form Breakthrough Energy Coalition,” by Jim Lane

At The Paris Conference on global climate change, Bill Gates announced the formation of a “coalition” of leading investors who have the skills, resources and experience to “drive” innovation from the lab to the market place” and provide “early-stage investing in potentially transformative energy systems”. This coalition hopes to change the risk-reward balance for early stage investment by providing “patient flexible risk capital” to work in order overcome daunting commercialization challenges that continues to plague clean energy project development and has driven away traditional angel or VC investors.

The strategy that this coalition plans to follow, calls for investment in early stage companies that have demonstrated the potential for providing affordable, reliable energy that produces zero carbon emissions. The “core principals” that will be followed include:

  • Identifying innovative research in the energy sector that are coming through government research pipelines of those countries that have committed to increased funding for research to find solutions to the serious problems created by climate change, high energy costs and energy price volatility.
  • Defining zero-emissions energy sector projects such as power generation, storage and distribution, transportation fuels, industrial processes, agriculture uses and that improve energy systems efficiency.
  • Obtaining expert advice from those that understand the technology and can analyze the underlying science to guide one’s investment decisions.
  • Making bold early stage investments in novel technologies and innovations which offer the potential for being more efficient, more scaleable, and or much cheaper than is currently available.
  • Committing to providing follow-on investment in promising projects to support their ramp-up to commercial scale and until such time as the project can qualify for conventional financing.

Gates’s recently formed “Breakthrough Energy Coalition” has plans to significantly increase spending on energy research that focuses on technological innovations “that will be cheaper and much more dependable than are today’s wind turbines and solar farms”. This Coalition plans to make early investment in research institutions having the most transformative clean energy ideas and having identified a viable pathway to commercialization. The institutions being targeted for early investment will be those not able to attract traditional financing because the risk threshold for this type of project is perceived as being too high.

Observations: Those innovations that this coalition is specifically targeting include “innovative nuclear reactors” as well as “artificial photosynthesis that uses solar energy to make hydrogen from water”. Members of this coalition are also investing in innovative “energy storage and transmission solutions” as well as “smart technologies that optimize energy consumed as electric power or as transportation fuel”. However, this coalition appears to have shown little interest in financing energy projects that are based around “known technologies”, where investment capital needed is deployed into projects that must compete directly against established energy and fuels providers. Advanced biofuels plant projects fall into this category and they often do have a high risk threshold, a significant valley of death to cross, while offering the prospect of producing only average rates of return. Even if such projects are able to offer “clean” fuel and energy and have a material impact on greenhouse gas abatement, it may not be enough to attract investment from Gates et al, as returns in investment in advanced biofuels projects do not offer home-run potential they seek.

The Perceived Role of Biofuels, How Much Will Be Needed

With respect to US biofuels requirements, under its “Renewable Fuel Standard (RFS) Program” The EPA has set an overall target for Year 2016 of 17,400 million gallons per year for all renewable fuels and 3,400 million gallons per year for advanced biofuels. As shown below, “renewable fuels are estimated to comprise 9.6% of liquid fuels consumed in the US, whereas advanced biofuels is less than 2%.

On a global basis, the biofuels that are produced and consumed include the large amounts of sugar-based ethanol that is produced outside of the US, so the biofuels percentage is slightly higher. An estimate was made of the amount of advanced biofuel that is available on a global basis using the US ratio of advanced biofuel to total renewable fuel. As shown below, on an annual basis the worldwide consumption is estimated at 6,300 million gallons per year, which suggests that 2,900 million gallons per year is consumed outside the US.

It is expected that the percentage of total world energy requirements provided by advanced biofuels will remain relatively small. And it is understandable that this may be a significant reason why the climate change activist community is paying less attention to promoting innovations that could improve prospects for producing significantly more clean, competitively priced advanced biofuels. But developing the advanced biofuel industry to its fullest should not be trivialized or ignored. As shown below, the US alone will need over 200 modest sized biorefineries just to satisfy EPA’s RFS mandates. At ~$150 million each, over $30 billion in investment capital would be needed.

Advanced Biofuels Required to Meet 2016 Renewable Fuels Standards as % 2016
Source: EPA’s RFS Fuels Nesting Scheme mmgals /yr US Fuels
Renewable Fuels Required in 2016 17,400 9.63%
Advanced Biofuels Required in 2016 3,400 1.88%
Typical W’ Waste-to-Jet Fuel Plant Yields
Waste Stream Processed (dry tons/day) 1,000
Operating Days per Year 337
Annual Tonnage Processed 337,325
Bio-Jet Fuel Yield gal/day 50
Bio-Jet Fuel Gallons/yr 16,866,250
in mmgal/plant 17
Number of Biorefineries Needed 202
Global Petroleum and Other Liquids Quantities Biofuels as
Source: US EIA October-November 2015 Update in mm bbls/day a % Total
Two Month Average Amounts Produced 95.9
Two Month Average Amounts Consumed 94.3
Two Month Avg. Biofuels Amounts Produced 2.3 2.40%
Two Month Avg. Biofuels Amounts Consumed 2.1 2.23%
Global Estimate of Advanced Biofuels Consumed 0.4 mm bbl/day
Global Estimate of Advanced Biofuels Consumed 150 mm bbl/yr
Global Estimate of Advanced Biofuels Consumed 6,291 mmgals.yr
Non-US Estimate of Advanced Biofuels Consumed 2,891 mmgals.yr

Where Things are Headed

We expect that developing advanced biofuels capacity in the US will probably advance in fits and starts for the next few years, as no breakthroughs in technology are in the pipeline and existing low cost feedstock’s are only selectively available. Further, at this point in time there is no pent up demand for advanced biofuels, as we are awash in low cost fossil fuels. In addition, financing these biorefineries will remain a challenge, as the risk threshold is still too high for conventional financing.

Unfortunately, financiers of innovation such as Gates et al, will not be enticed by biorefinery projects that are still commercially unproven and that will have to compete with petroleum refinery operations that are. We see no compelling desire on part of the oil industry to establish biorefineries, as there are no incentives for them to make biofuels, as they are still able to acquire what they need for blending purposes on favorable terms. At this juncture, we believe there will be only a limited number of potential bio-refinery project opportunities worth pursuing. However, even in these instances, there has to be a convergence of sets of circumstances that could justify such projects.

Unfortunately, we have only one such project in our pipeline and its success is still tenuous.

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